John Pointon

Does the inflation rate affect the performance of the stock market? The case of Egypt

Abstract The intention of this paper is to examine the impact of the inflation rate on the performance of the Egyptian stock market. Particular attention is paid to the effects of the rate of inflation on various stock market performance variables, in terms of market activity and market liquidity. From the co-integration analysis through error correction mechanisms (ECM), significant long-run and short-run relationships between the variables are found, implying that the inflation rate has had an impact upon the Egyptian stock market performance generally.

DIVIDEND POLICY, TRADING CHARACTERISTICS AND SHARE PRICES: EMPIRICAL EVIDENCE FROM EGYPTIAN FIRMS

For a sample of 94 firms, using data up to 1999, we find that retentions are more significant than dividends in determining prices of shares that are actively traded on the Egyptian stock market. However, for non-actively traded shares, the accounting book value is the most important determinant. Reductions in dividends are associated with a lack of liquidity and profitability. Dividend increases are linked to higher pre-tax operating profit effects, which outweighed post-tax effects. As to aspects that influence dividend payout ratios of actively traded firms, important factors are gearing and the market to book value, the latter a surrogate for investment opportunities. For non-actively traded firms, a more complex pattern emerges.

Shareholders versus stakeholders: corporate mission statements and investor returns

This paper seeks to discover whether companies that adopt a stakeholder approach, and thereby demonstrate a wider remit of corporate responsibility, provide inferior returns to those that embrace the shareholder value approach. To classify approaches, mission statements were analysed, the final sample comprising 32 shareholder oriented companies and 48 stakeholder oriented companies. To assess performance both accounting–based and market–based measures were used. A number of moderating variables were taken into account: systematic (beta) risk, gearing (long–term debt to total long–term finance), tax ratios, and firm size. ANOVA and Kruskall–Wallis tests revealed that mission orientation did not affect performance, whether in terms of stock returns or excess returns. Neither were accounting returns on equity different overall, although shareholder oriented companies experienced wider variations in this measure. A number of multiple regressions were also performed. However, the mission dummy was not found to be a significant variable.

Practitioners' perspectives on the UK cost of capital

The aims of this study were to determine how UK finance practitioners derive and review the cost of capital, and to ascertain whether the final figure varied with the choice of method. To investigate behaviour in the real world a survey questionnaire was employed, eliciting responses from the finance directors of 193 UK quoted firms. The results suggest that the cost of capital calculation is subject to wide variation across firms, both with regard to the overall figure and the precise computation of its components. The intuitive appeal of the WACC and CAPM approaches appears to ensure their continued popularity in the real world. However, firms tend not to make all of the adjustments to the overall figure which academics might expect, only making simple adjustments for risk and the tax advantage to debt. The after-tax money cost of capital which is approximately 10%, is influenced by the choice of method, and firms do not appear to revise their overall cost figure rapidly in response to the environment. The cost of capital decision is of such strategic importance for the longer-term maintenance and expansion of firm value that it is nearly always made within the domain of the board of directors.

Capital structure and firm characteristics: an empirical analysis from Egypt

Purpose - The aim of this paper is to investigate differences in capital structures across industries in Egypt paying particular attention to: corporate characteristics, such as liquidity, asset structure, growth, and size; fiscal characteristics, namely, the application of differential corporate tax rates; and stock market activity. Design/methodology/approach - Comparisons are made between the four main industrial sectors: food, heavy industries, contracting and services. For each industry four aspects of capital structure are assessed. Firms are also classified according to whether their shares are actively traded on the Egyptian stock market. Multiple regressions are run to test a range of hypotheses. ANOVA and multiple comparison procedures are also employed. Findings - Across Egyptian firms, higher business risks do not generally result in lower levels of long-term capital structure. The contracting sector is significantly different from food, heavy industries and services in its determinants of its short-term financing and interest ratios. The sector also has a higher level of debt, and so a hypothesised tax-induced higher debt level for the services sector, which has the highest corporate tax rate, is rejected. Asset-backing is particularly important in heavy industries, and in non-actively traded firms. Size and growth are positively related to short-term financing in heavy industries and services. Originality/value - The value lies in the comprehensiveness of the study, covering both short- and long-term capital structures across industries, both income measures and capital indebtedness, and distinctions according to whether the shares are actively traded or not.

Credit scoring and decision making in Egyptian public sector banks

Purpose - The main aims of this paper are: first, to investigate how decisions are currently made within the Egyptian public sector environment; and, second, to determine whether the decision making can be significantly improved through the use of credit scoring models. A subsidiary aim is to analyze the impact of different proportions of sub-samples of accepted credit applicants on both efficient decision making and the optimal choice of credit scoring techniques. Design/methodology/approach - Following an investigative phase to identify relevant variables in the sector, the research proceeds to an evaluative phase, in which an analysis is undertaken of real data sets (comprising 1,262 applicants), provided by the commercial public sector banks in Egypt. Two types of neural nets are used, and correspondingly two types of conventional techniques are applied. The use of two evaluative measures/criteria: average correct classification (ACC) rate and estimated misclassification cost (EMC) under different misclassification cost (MC) ratios are investigated. Findings - The currently used approach is based on personal judgement. Statistical scoring techniques are shown to provide more efficient classification results than the currently used judgemental techniques. Furthermore, neural net models give better ACC rates, but the optimal choice of techniques depends on the MC ratio. The probabilistic neural net (PNN) is preferred for a lower cost ratio, whilst the multiple discriminant analysis (MDA) is the preferred choice for a higher ratio. Thus, there is a role for MDA as well as neural nets. There is evidence of statistically significant differences between advanced scoring models and conventional models. Research limitations/implications - Future research could investigate the use of further evaluative measures, such as the area under the ROC curve and GINI coefficient techniques and more statistical techniques, such as genetic and fuzzy programming. The plan is to enlarge the data set. Practical implications - There is a huge financial benefit from applying these scoring models to Egyptian public sector banks, for at present only judgemental techniques are being applied in credit evaluation processes. Hence, these techniques can be introduced to support the bank credit decision makers. Originality/value - Thie paper reveals a set of key variables culturally relevant to the Egyptian environment, and provides an evaluation of personal loans in the Egyptian public sector banking environment, in which (to the best of the authors knowledge) no other authors have studied the use of sophisticated statistical credit scoring techniques.

The Exposure of Shipping Firms' Stock Returns to Financial Risks and Oil Prices: A Global Perspective

Shipping is an industry that is highly geared towards international trade and therefore, would seem to be highly susceptible to fluctuations in macroeconomic factors. This article investigates the impact of exchange rates, interest rates and oil prices on stock returns of 143 shipping companies from 16 countries. We also investigate the factors which determine the extent to which firm are sensitive to macroeconomic variables. Our results indicate that the low incidence of significant exposure to exchange rate and interest rates suggests that most shipping firms have utilised reasonably successful hedging strategies to reduce the impact of these macroeconomic risks. Finally, we find that, for the minority of shipping firms significantly affected by oil price increases, the effects have usually been beneficial.

Determinants Of Capital Structure In The Uk Retail Industry: A Comparison Of Multiple Regression And Generalized Regression Neural Network

Firms need to rely on different financing sources, but the question is how capital structure is determined for a particular industry. Our aim is to undertake an investigation into the factors which determine capital structure in the UK retail industry. Our initial sample consists of 163 (final sample: 100) UK retail companies, using data from 2000 in order to analyse capital structure from 2002 to 2006. Nonlinear models tend to be unduly neglected in capital structure research, and so we apply generalized regression neural networks (GRNNs), which are compared with conventional multiple regressions. We utilize a hold-out sample for the multiple regressions to make them comparable with the GRNNs. Stability of the data is also confirmed. Our main findings are: net profitability and the depreciation-to-sales ratio are key determinants of capital structure based on GRNNs, while two more variables are added in the multiple regressions, namely size and quick ratio; there is strong support for the pecking-order theory; both root-mean-square errors and mean absolute errors are much lower for the GRNNs than those for the multiple regressions for overall, training and testing datasets. The potential benefit of this research to financial managers and investors in the UK retail sector is the identification of the overriding role of net profitability in reducing the financial risk from high levels of gearing. Copyright

Share Valuation under Geometric Brownian Motion with a Poisson Imputation Tax Change

A share valuation model is developed on the basis of dividends following a geometric Brownian motion. An imputation tax system is chosen, although this can be collapsed into a classical system. The possibility of changes in tax rates and shareholder tax credits is introduced by means of a Poisson jump. Capital gains are assumed to be tax-free through either annual or other exemptions. Using Itos Lemma, a new share valuation formula is derived. This is recast in terms of the cost of capital and the mean time to the fiscal shock. Copyright Blackwell Publishers Ltd 1998.

Inflation, Taxation and the Valuation of Shares

Abstract A share valuation model is developed that takes account of the possibility of shareholding periods extending beyond one year, income taxes, capital gains taxes paid on realised gains and indexation for inflation. For an infinite dividend series, an optimal shareholding period is derived, which is shown to be related to the level of the after-tax risky rate, discounted at the growth rate, vis-a-vis the after-tax riskless rate, deflated for the general rate of inflation. In turn, this determines whether or not the value of the share is indifferent to the capital gains tax rate and the rate of inflation.